CL short-term and longer-term views

As predicted, CL tested the mid-55 level today and actually broke into the lower quarter near the 20-day SMA support.  There were very easy day trade shorts in the contract this morning.

XLE, XOP, and OIH all found support today as CL fell.  The last time we saw this non-conformation was on 2-12 which led to some short-term buoyancy/upside for the next few days in the energy complex.

Factors that impact the longer-term trend:
1.) Increasingly mixed economic data from US, Eurozone (heightened by Brexit uncertainty), and China has motivated OPEC+ (especially Saudi Arabia) to proactively cut exports especially to the US.  These cuts take into account prevailing US production and export figures especially from the Permian concurrently spiking to all-time highs.
2.) Trade agreement between China and US will probably include increased demand for WTI exports.  And Chinese capital ratio stimulus in January seems to be working suggested by FXI and Shanghai Composite rallies year-to-date.  A rebound in the Chinese economy is becoming increasingly probable later this year which would buoy that trade agreement.
3.)The Fed expects a slowdown in US economic growth this year leading to a pause and "patience" in rate hikes.

Synthesis:
At this point in time the major proportion of demand for WTI comes from the US, and I expect an economic slowdown in the forseeable future which will depress physical demand at Cushing.  Later on this year as post-Brexit uncertainty subsides (buoying Brent) and a Chinese economic rebound ensues (boosted by the cap ratio cut and a prospective trade agreement) followed by increasing US exports, foreign demand will play an increasingly important role in CL price discovery as Permian-Gulf Coast pipelines come on-line and port capacity is expanded -- but not quite yet.  Yes, OPEC+ cuts and other geopolitical events have limited heavy dark, sour oil from being imported in the US, but the supply of US light, sweet product continues to build up in storage at Cushing.  A lot of gulf coast refineries mix imported dark, sour product with WTI to produce gasoline.  They have the option to source dark, sour elsewhere or switch infrastructure to support more WTI.  Either way, the rate-limiting reagent is heavy, sour oil in an expanding light, sweet reservoir thanks to Permian production.  There's not much OPEC+ can do to directly impact light, sweet crude oil supply and potentially inundated physical buyers at Cushing.


Despite the possibility of a short-term bounce, I am confident that the equity markets are extremely close to a longer-term top and a prospective volatility spike which will fuel correlated oil selling, reasserting the longer-term downtrend.  So for the time being, I continue to believe that WTI will need to retest the December lows in another bear market intermediate-term downtrend leg before other forces like a rebounding Chinese market primed to buy US oil exports and post-Brexit reduced volatility in Eurozone boons Brent prices from a demand perspective.  

CL to fall and retest mid 55s in short-term

I was short April CL after the EIA number for a ride down to new lows on the day.  XOP lost a lot of upside momentum today as the daily RSI(7) fell by almost 16 points compared to yesterday's reading of 67.8930.  The last 2 times it has registered day-over-day losses of this magnitude in this regime since the December bottom, WTI has seen tradeable short-term weakness 1-2 trading days later and I expect no different this time.

CL tests multiweek highs

CL did test the lower quarter of 51 handle this past Monday.  At the same time, XOP did not confirm new local lows killing the short-term downside momentum, and the crack spread has widened out to multiweek highs.  Additionally, equites are very overheated and look to putting in a blow off top in the coming days next week.  This risk-on momentum buoyed WTI this week.  I don't expect this retest of the local highs in mid 55s to last, and as soon as equities top out, CL will resume its nasty rollover.  I view this move a test of previous highs in a longer-term topping formation.

CL small gain on day

I had long day trades in the contract but its activity today still has me bearish short and intermediate term.  The crack spread's spike to multi-week highs maintained a slight bid in the underlying.  I see support from previous local lows, the 50-SMA, and Bollinger Band (2,20) lower band at around $51.00.

NG cash market approaches 2018 lows

The Henry Hub cash market fell over 4% to 2.552 today putting it within striking distance of the 2.48 2018 low.  The first surge down occurred overnight followed by another leg down as a reaction to the storage number at 10:30am EST.  Interestingly, the March-April spread has gone negative for the first time in this calendar year's history suggesting commercials pricing in ample supplies by end of Winter.  The key assumption being that unseasonably warm temperatures continue...

If the market probes those 2018 lows, I would be looking to buy OTM calls for a short-covering rebound in prices reacting to a mean-reversion in Southern temperatures since it is still technically Winter.  The Google temperature mobile app is a good indicator for when temperatures will drop enough to cause short-covering.  I'm looking for a prediction of lows in the 20s and highs no greater than 40s in Raleigh, NC.  I've noticed a strong inverse correlation between Southeast temperatures and NG prices this year since inventories are currently 17.5% below the 5-year average and at almost 8-month lows.

Crude oil weakens led by XOP

Softening Eurozone economic data and news from the Trump administration that he may not meet Xi for possible trade resolution until March caused a sharp sell off in the Oil Producers ETF, XOP.  This index broke through 2 standard deviation lines today after failing at the 50-SMA which is very bearish short-term in a longer term bear market punctuated by a bear market rally since late December.  This slide could mark the beginning of the next primary bear market downswing in the energy space - oil derivatives and energy equities.

Crude Oil - Big Picture

From the middle of 2014 to early 2016, WTI fell almost 75%.  Oil inventories were very high because of overproduction as shale sources increasingly came on-line.  OPEC did not cut output at this time to try to squeeze the small US frackers whose profit margin was destroyed in the meltdown.  At the end of 2015, crude oil export was legalized and the price rebounded for almost 3 years driven by a booming US economy.  In the Fall of 2018, another market swoon hit as threat of a US economic slowdown materialized and again supplies were high due to shale production.  But this time, OPEC did initiate production cuts effective January 2019, yet the US (now the world's largest crude exporter) and Brazil continued to increase production.

Oil and equities have traded with a high direct correlation since the October top, and even on this rebound since December 26th.

CL tested the upper (20,2) Bollinger band 2 days ago, and price is pinned between the 20-sma and this upper band.  IV continues to drift lower, not showing signs of range breakout yet.  This past Monday, CL fell precipitously at key times after 8am which suggests commercial seller distribution, but today the market was supported by EIA.  I don't have a feel for the breakout direction, but do believe that a topping equities very soon (next few days) will lead to significant downside in both markets.

Natural Gas - Big Picture

Beginning in 2000 through the middle of this decade, natural gas was financialized through commodity ETFs and prop trading desks at hedge funds and banks.  This influence subsided just a few years ago thanks to Volcker and other regulations greatly reducing the ability of Wall Street banks to accumulate delta risk.    Since then, natural gas prices have resumed a seasonal trend of price spikes in the 4th quarter similar to how the commodity traded in the 1990s.

After a breakout to multiyear highs in mid November 2018, NG has pulled back below $3.00 typical of the seasonal pattern observed in recent years.  While trading near multi-month lows, NG has yet to show confirmation of a short-term bottom though its decline has halted over the past 4 days.

Intro post

The Federal Reserve raised the Fed Funds rate 4 times to 2.50% in 2018, the highest levels since the Financial Crisis, causing asset volatilities (realized and implied) to markedly increase.  Opportunities in proprietary trading not available earlier this decade have emerged accordingly, exacerbated by the Volcker rule and other regulations limiting banks with deposits at the Federal Reserve.

At the end of 2015, the federal ban on crude oil exports was lifted.  Since then, the US has become the world's largest crude oil producer and its de facto marginal supplier credited to hydraulic fracturing innovation.  Because of quality specifications and deliverability, growing international commercial trading interest in the American energy derivative space has caused the CME WTI futures contract to emerge as a formidable contender to be the global price discovery source in light, sweet crude oil.

US economic demand for crude oil may wax and wane cyclically against a backdrop of increased energy efficiency.  In reaction, domestic producers seek to diversify their customer base and tap into long-term global growth and continued demand for fossil fuels.  These newer foreign buyers are increasingly transacting in the CL futures market reflecting those shifting export fundamentals.  A changing participant pool with increasingly diversified market outlooks and views aligns with a fresh macro environment fostering volatility to create unique opportunities in CL for years to come.